Chapter 12- Corporations Flashcards
Characteristics of a corporation
- separate legal entity
- ownership rights transferable= continuous life
- shareholders aren’t corporate agents
- ease of capital accumulation (keep profit)
- government regulations
- corporate taxation
How do corporations work
investors purchase shares and then vote to elect the board of directors and the directors hire managers: CEO, CFO
organizational costs
expensed as incurred not capitalized
How is the income statement different?
other revenues and expenses
profit before tax— (you’d multiply this amount by the tax rate)
less income tax–
profit
Statement of changes in equity
Common s | preferred s | RE | total
Balance Jan 1
issuance of s x x xx
Profit(loss) x x
Dividends (x) (x)
Balance dec31 x x 0 xx
parts of statement of changes in equity
retained earnings- which track profit/ loss and dividends
share capital- classes as common shares or preferred shares which is the amount invested by shareholders
dividends- taken out of retained earnings considered withdrawals of shareholders
Balance sheet for corporation - equity section
Contributed capital:
Preferred shares, unlimited authorized:
7000 shares issued and outstanding——— 10,000
Common shares, unlimited authorized:
8000 shares issued and outstanding ——-20,000
Retained earnings ——————————–5,000
Total equity———————————————-35,000
equity financing
issuing (selling shares) in order to by capital
common share issuance entry;
dr cash 2000
cr common shares 2000
-100 shares issued for 2000 $
(cash could be land/buildings/ merch etc)
preferred shares
- priority over common when receiving dividends and distribution of assets on liquidation
- *can’t vote
- listed BEFORE common shares on equity section of Balance Sheet
preferred shares journal entry:
Dr cash 300
Cr preferred shares 300
20 shares issued
why do corporations issue preferred shares?
- increase capital without sacrificing control
- increase return to common shareholders
- make investors happy
- when the market price of common shares are too low
cash dividends
distribution of earnings to shareholds
- paid in cash or more shares
- taken out of retained earnings
- board of directors declare when this occurs
Dates for cash dividends and corresponding entries
Date of declaration:
Dr cash dividends
cr common dividends payable
Date of record (ID shareholders to be paid- no entry)
Date of payment:
Dr common dividends payable
Cr cash
closing entries
- use REID but D is now dividends
- close cash dividends to retained earnings
- close revenue expense and is also to retained earnings
deficit and cash dividends
dr balance in retained earnings means there’s a deficit- this is a loss.
-when there’s a deficit equity has decreased therefore you can’t pay cash dividends
preferred cumulative shares
undeclared dividends accumulate until they are paid– common shareholders dont receive shares until preferred are paid
non-cumulative shares
-no right to prior unpaid dividends if they weren’t declared.
when does a liability for dividends exist?
when declared *undeclared cumulative shares must be disclosed in notes to financial statements
types of preferred shares
non-participating
participating
convertible
collable
non-participating preferred shares
dividends limited to max amount per year
participating preferred shares
share extra cash dividends with common shareholders
convertible preferred shares
option to exchange preferred shares into common shares at a certain rate because there’s a higher potential return
callable preferred shares
corporation may purchase shares (to retire them) from shareholders- called redemption value or call price
call price= issue price + premium
